In our first blog post of 2017, Sezzle CBDO Paul Paradis shared his expected implications from the rise of debit usage. Articles like these represent our take on how market trends will affect the payments space going forward. This blog post will build on Paul’s prior thoughts and focus on the creation of market opportunities from consumers’ aversion to debt.
Why has debit usage surged?
We’ve often discussed how the increased usage of debit cards has been traced primarily to millennials (Gen Y). The reason for millennials’ high rates of debit card usage has primarily been deemed as preference. The central driver of this preference is usually hailed to be debt aversion.
Millennials have been significantly influenced (by parents, family, etc.) to have a heightened awareness of the danger that credit can carry. With student debt rising and millennials’ debt position being much heavier than previous generations, it makes sense that they would prefer the use of debit and shy away from potential credit issues.
I offer another argument. I see limited millennial awareness for payment options. This lack of awareness, coupled with legislation that makes credit cards much less accessible (i.e. CARD Act of 2009) presents a different picture as to why debit card usage is on the rise. This argument suggests an alternative set of conclusions about the millennial consumer segment and the future of payments.
Questions about credit card adoption and millennials’ fear of fine print, compounding interest, and annual fees have also contributed to the rise of another payments group: alternative (cardless) credit.
Millennials’ low rates of credit card usage present an opportunity for the rise of more transparent and flexible financing options. Affirm is the most well-known offering in the US and was founded with the mission to provide a credit method that challenges the deceptive practices of other credit providers (price fixing, pushing add-on products, etc.).
Affirm seeks to partner with merchants that have high average order values, pitching a flexible financing option to consumers who can’t afford the purchase outright. At any store that accepts Affirm, a quick credit decision is offered with clear lending terms. Affirm presents a number of repayment options that the consumer can select based on how much and how quickly they can pay off the loan.
Affirm announced that it had reached the milestone of 1 million loan installments in early 2017. Loan volumes tripled in 2016, and signs point to increased growth through 2017. Is this validation of a market demanding better financing options? Affirm believes so, and continues to expand on its goal to do right by consumers. Opponents will counter that the cost of using Affirm is too great for consumers, with APR terms that have been quoted as high as 30%.
Other players in this space include Futurepay, Bread, and Afterpay. Each provides a different value proposition for alternative credit offerings.
While Affirm and other alternative credit models are hoping to challenge credit card networks on loan terms and improve transparency with consumers, many require merchants to get involved in the lending process and don’t do enough in the way of lowering processing costs. At Sezzle, we’re focusing on both sides of the transaction, offering rewards to consumers that pay with debit while providing a lower-cost processing service for merchants.
What do you think about alternative credit offerings and their growth? What other opportunities exist for payment innovation that will capture millennials’ loyalty? Give us a shout below!